Pension IHT planning: what to review before April 2027

For many years, pensions have been one of the most effective ways to pass on wealth because they generally sat outside an estate for inheritance tax (IHT) purposes. In my experience, many people have built retirement and estate plans around that assumption. From April 2027, those plans deserve a fresh look.

The right response won't be the same for everyone. But if pensions form a significant part of your wealth, now is a good time to review whether your existing arrangements still deliver the outcome you want for your family.

Understand what's changing

From 6 April 2027, most unused pension funds will count towards your estate for IHT. Whether this increases the IHT due will depend on the value and make-up of your estate, the nil-rate bands for IHT and any other allowances or exemptions that apply. But the fact is, for most clients, the uplift in tax will be significant.  

If you’ve lived abroad or have pensions based overseas, the position may be more complex as your residence status could affect which pension benefits are subject to IHT in the UK.

Reconsider the order you draw on savings and investments

Should pensions still be the last pot you touch?

Pensions have traditionally been preserved for as long as possible, with other savings and investments used first. One of the most common questions I'm discussing with clients today is whether that approach still makes sense under the new rules. For some, it will. For others, it may be worth reconsidering how different assets are used throughout retirement.

Cash flow modelling can help you explore the potential effect of drawing on your pension sooner rather than later, including what it could mean for your retirement income, tax position and the amount you may eventually pass on to your family.

Why age 75 matters

If you die before 75, pension death benefits can usually be paid to your beneficiaries free of income tax, subject to certain limits and conditions. If you die at 75 or over, beneficiaries will usually pay income tax on the benefits they receive. The new rules may mean IHT applies in either case, although income tax is not charged on the part used to meet the IHT liability. This can affect how much is ultimately passed on to your beneficiaries and the total tax that needs to be paid.

Review how you use pension withdrawals for gifting

The changes in April 2027 may also prompt you to consider whether you would like to pass on more wealth during your lifetime, when your family may be able to benefit from it sooner.

Gifting may form part of the answer, but the right approach depends on your wider financial position, retirement plans and income requirements.

There are broadly two ways to gift money from pension withdrawals, both of which could help reduce the IHT bill on your estate. A one-off gift to an individual is usually treated as a potentially exempt transfer or PET. If you survive for seven years after making the gift, its value falls outside your estate for IHT.

Alternatively, regular gifts from surplus income may qualify for an IHT exemption, provided the relevant conditions are met. Bear in mind that pension withdrawals may themselves be subject to income tax. A Wealth Planner can look at your overall tax position and how withdrawals and gifting may affect your retirement income and wider estate plan.

A regular pattern of gifts can also be easier to show for the surplus income exemption, so it’s worth keeping clear records.

One of the most common misconceptions I encounter is that gifting is purely an IHT decision. In reality, it needs to be considered alongside retirement income needs, future spending plans and the wider wealth available to you.

Check your pension nominations and beneficiaries are up to date

Benefits passing to a spouse, civil partner or qualifying charity will generally be exempt from IHT, while most benefits passing to children or other beneficiaries will fall within the new IHT rules. So, who ultimately receives the benefits can make a meaningful difference to the IHT position.

I've found that many people complete nomination forms and then forget about them. The April 2027 changes make this a good opportunity to check whether your beneficiaries still reflect your wishes and wider family circumstances.

Think about how an IHT bill on your pension could be paid

When clients think about IHT, they often focus on how much could be due. Just as important is how that liability might actually be paid.

Poor planning can create unnecessary delays, administrative complexity and added pressure for loved ones at an already difficult time.

If your pension holds assets that cannot be sold quickly, such as commercial property, it may take longer to release funds to meet an IHT bill. This could be particularly relevant if property makes up a significant proportion of your pension, so it is worth considering how any liability would be funded and how your pension funds themselves are invested.

Where IHT is due on pension benefits, HMRC is setting up a new mechanism for personal representatives or administrators, the Pensions Direct Payment Scheme, which allows the tax to be paid directly from the pension. A separate withholding notice can also allow some pension benefits to be held back temporarily while the amount due is established.

Whole of life cover, written in trust where appropriate, is another option that could provide funds towards any future IHT liability.

In my experience, families are often far more concerned about complexity and uncertainty than the tax itself. Knowing how a liability would be funded can remove a great deal of pressure later on.

Keep a clear record of your pension arrangements

When the time comes, your personal representatives will need to identify each pension you hold and request information from the relevant scheme administrator. From April 2027, scheme administrators will have 28 days to provide the initial pension information after receiving a valid request.

Keeping a clear record of your pension providers and policy details can make this easier for your family and personal representatives. Consolidating pensions can make administration simpler, but transferring may mean losing existing guarantees, tax protections or the right to access your pension at an earlier age. Discuss these trade-offs with a Wealth Planner before transferring.